If you own an IRA or recently inherited one, beneficiary decisions can affect how the account is transferred, taxed, and distributed. The available options depend on the beneficiary’s relationship to the original owner, the type of IRA, and whether the owner had reached the required beginning date for required minimum distributions.
The terms “inherited IRA” and “beneficiary IRA” generally describe an IRA inherited after the original account owner’s death. These terms may be used interchangeably, but they do not identify whether the account is a Traditional or Roth IRA. Confirm the account type with the IRA provider before making distribution or transfer decisions.
Why You Should Update Your IRA Beneficiaries
The beneficiary designation on an IRA generally determines who receives the account, even when a will names someone else. State law, marital rights, and the terms of the IRA agreement may also affect the result.
Review your beneficiary designations after marriage, divorce, a birth, a death, or another major life change. Outdated information could cause the IRA to pass to someone you no longer intend to benefit.
You can update your selections by submitting a beneficiary designation form to your IRA provider. If you name a trust, the provider may require a copy of the trust documents. Consult an estate planning attorney before naming a trust because the trust’s terms can affect the distribution rules.
Who Can You Name as an IRA Beneficiary?
You may be able to name one or more people or organizations, including:
- A spouse
- Children, grandchildren, relatives, or other individuals
- A qualifying trust
- A charity
- An estate
You may also divide the IRA among multiple beneficiaries by assigning a percentage to each one. Review the form carefully to confirm that the percentages total 100% and that the selections reflect your intentions.
Primary and Contingent Beneficiaries
Primary Beneficiary
A primary beneficiary is the person or entity designated to receive the IRA after the account owner’s death. You can name one primary beneficiary or divide the account among several primary beneficiaries.
The beneficiary form and IRA agreement determine what happens if a primary beneficiary dies before the account owner. Depending on the designation, that beneficiary’s share may pass to the surviving primary beneficiaries or to the deceased beneficiary’s descendants. Review whether the form allows a per stirpes designation if you want a beneficiary’s share to pass to their descendants.
Contingent Beneficiary
A contingent beneficiary receives the IRA if no primary beneficiary survives the account owner or qualifies to receive the assets. For example, an account owner might name a spouse as the primary beneficiary and their children as contingent beneficiaries.
Contingent beneficiaries should also be reviewed regularly. Changes in family circumstances may affect whether the designation still reflects your wishes.
Spouse and Non-Spouse Beneficiary IRAs
A surviving spouse generally has more options than a non-spouse beneficiary. The available choices also depend on whether the spouse is the sole beneficiary and whether the original owner died before or after the required beginning date.
Surviving Spouse
An eligible surviving spouse may be able to:
- Treat the inherited IRA as their own IRA
- Roll eligible funds into an existing or new IRA in their own name
- Keep the account as an inherited IRA and take distributions under the beneficiary rules
- Use the 10-year rule in certain cases when the original owner died before the required beginning date
Keeping the account as an inherited IRA may be useful when the surviving spouse is younger than age 59½. Distributions from an inherited IRA due to the owner’s death are generally not subject to the 10% additional tax on early distributions.
If the surviving spouse moves the assets into an IRA in their own name, the account becomes subject to the spouse’s distribution rules. A distribution taken before age 59½ may be subject to the additional 10% tax unless another exception applies.
Non-Spouse Beneficiary
A non-spouse beneficiary cannot treat an inherited IRA as their own or complete a 60-day rollover. The account may be moved through a direct trustee-to-trustee transfer, but it must remain properly titled as an inherited IRA for the beneficiary.
If a non-spouse beneficiary receives the funds personally, the distribution generally cannot be returned to the inherited IRA or rolled into another inherited IRA.
Opening a Beneficiary IRA at IRAR
To establish a Beneficiary IRA at IRAR, the beneficiary must complete the applicable account documents and provide documentation of the original account owner’s death. Contact IRAR for current document and certification requirements before sending an original death certificate or other records.
An inherited IRA is titled differently from an IRA opened in the beneficiary’s own name. The title must identify both the deceased account owner and the beneficiary. IRAR will provide the required titling instructions during the account-opening process.
Beneficiary IRAs are subject to IRAR’s standard account fees. Review the current Self-Directed IRA fees for more information.
Inherited IRA Distribution Options
The applicable distribution method depends on the type of beneficiary and whether the original owner died before or after their required beginning date.
Eligible Designated Beneficiaries
An eligible designated beneficiary is:
- The surviving spouse
- The minor child of the original account owner
- An individual who is disabled
- An individual who is chronically ill
- An individual who is not more than 10 years younger than the original account owner
Eligible designated beneficiaries may qualify to take distributions based on life expectancy. When the original owner died before the required beginning date, an eligible designated beneficiary may also be able to elect the 10-year rule.
A minor child of the original account owner may use the life expectancy method until reaching age 21. The remaining account must generally be distributed by the end of the tenth year after the child reaches age 21.
Other Individual Beneficiaries
An individual who is a designated beneficiary but not an eligible designated beneficiary is generally subject to the 10-year rule.
If the original owner died before the required beginning date, the beneficiary generally does not have to take annual distributions during years one through nine. However, the entire account must be distributed by December 31 of the tenth year following the year of death.
If the original owner died on or after the required beginning date, annual required minimum distributions generally must continue during the 10-year period. The remaining balance must still be distributed by the end of the tenth year.
Estates, Charities, and Certain Trusts
An estate, charity, or another beneficiary that is not an individual is generally treated as a non-designated beneficiary. Some properly structured trusts may qualify as designated beneficiaries, so trust beneficiaries should be reviewed by a qualified estate planning or tax professional.
If the owner died before the required beginning date, a non-designated beneficiary is generally subject to the five-year rule. The entire account must be distributed by December 31 of the fifth year following the year of death.
If the owner died on or after the required beginning date, distributions are generally based on the original owner’s remaining life expectancy.
Lump-Sum Distribution
A beneficiary may generally choose to withdraw the entire account, subject to the IRA agreement and applicable distribution rules. A taxable distribution from an inherited Traditional IRA is generally included in the beneficiary’s income. The 10% additional tax on early distributions generally does not apply when the distribution is made because of the original owner’s death.
Moving an Inherited IRA
A non-spouse beneficiary must use a direct trustee-to-trustee transfer when moving an inherited IRA to another provider. The receiving account must preserve the inherited status and identify the original owner and beneficiary.
Inherited IRAs from different original owners cannot be combined. In some cases, inherited IRAs of the same type received from the same original owner may be combined or aggregated. Confirm the titling and distribution requirements with the receiving custodian before moving the assets.
Taxes on Inherited IRA Distributions
Taxes depend on the type of IRA inherited and the tax treatment of the funds:
- Inherited Traditional IRA: Distributions of previously untaxed contributions and earnings are generally subject to ordinary income tax.
- Inherited Roth IRA: Contributions can generally be withdrawn tax-free. Earnings are also generally tax-free if the Roth IRA’s five-year holding requirement has been met.
If an inherited Roth IRA has not met the five-year holding requirement, the earnings portion of a distribution may be taxable. The distribution generally remains exempt from the 10% additional tax when it results from the original owner’s death.
How the SECURE Act 10-Year Rule Works
The SECURE Act changed the inherited retirement account rules for many beneficiaries when the original owner died after December 31, 2019. Most individual beneficiaries who are not eligible designated beneficiaries must fully distribute an inherited IRA by December 31 of the tenth year following the year of death.
Eligible designated beneficiaries may qualify for life expectancy distributions. These include surviving spouses, the original owner’s minor children, disabled or chronically ill individuals, and individuals who are not more than 10 years younger than the owner.
Whether annual distributions are required during the 10-year period depends largely on whether the original owner died before or after the required beginning date. Inherited Roth IRAs are generally treated as though the owner died before the required beginning date because Roth IRA owners do not take lifetime RMDs.
Review Your Beneficiary Information
Beneficiary designations determine who receives your IRA and may affect how quickly the assets must be distributed. Review your selections regularly and make sure your IRA provider has the correct names, percentages, and contact information on file.
Inherited IRA rules are highly dependent on the original owner, beneficiary, account type, date of death, and IRA agreement. Consult the IRA provider and a qualified tax or estate planning professional before selecting a distribution method or moving inherited assets.
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